Active fixed income
Active Fixed Income Perspectives Q2 2025: Risks to realities
April 30, 2025
The economic and policy focus shifted recently from assessing potential risks to managing realities. Soft sentiment indicators will soon give way to hard results on inflation, trade balances, employment, wages, and earnings. We believe bonds remain well positioned to offer attractive income and higher returns if downside risks increase.
Vanguard Active Fixed Income Perspectives Q2 2025 (16-page PDF) is our in-depth quarterly commentary on the bond markets, with sector-by-sector analysis and a summary of how those views affect Vanguard’s actively managed bond funds.
Key takeaways
Performance recap
Higher-quality bonds have outperformed so far this year as Treasury yields broadly declined and credit spreads widened. Tariff policy vacillation and weaker consumer sentiment data sparked fears of a slowdown in economic growth. Positive bond returns helped cushion the volatility in U.S. stocks.
The big picture
Recently implemented tariffs by the U.S. were higher than expected and will have a substantial economic impact if maintained. Consequently, we revised our growth and labor market forecasts down and increased our outlook for inflation. While the likelihood of a recession has risen, the underlying economic fundamentals still show signs of strength. Inflation pressures could limit the Federal Reserve’s policy options.
Our approach
Before the tariff announcements, we trimmed credit risk and moved up in quality. We remain optimistic on interest rates, favoring intermediate maturities as a hedge against our credit exposure. Credit valuations have improved, but not sufficiently to offset the increased uncertainty. We are overweight sectors that are more resilient to growth and policy risks. In municipal bonds, we anticipate strong flows into the summer months and see significant value in high-quality bonds at the long end of the curve.
Active Fixed Income Perspectives: Q2 2025
Notes:
All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.